Holding their breath

After a sluggish start to the year, developers in Hungary were hoping to see a major upswing in the closing months, but in fact ended up as anxious spectators of the global financial crisis. For the time being, investors have no choice but to wait and hope

Gergo Racz

In response to the pressures of the global financial forces, Hungary’s Finance Ministry has announced that it is revising its cornerstone figures for the 2009 national budget. The credit crunch and its implications for Hungary will most likely result in a raising of the 4.3 pct inflation bar while the Finance Ministry has already slashed its 3 pct economic growth forecast to 1.2 pct. However, the ministry has said it is committed to achieving its 3.2 pct of GDP deficit goal as a key pre-condition for meeting the Maastricht criteria for adopting the common European currency. Hungary’s latest inflation figure in September was 5.7 pct, with a 3 pct mid-term target designated by the Central Bank (MNB). Analysts estimate that Hungary’s 2008 GDP growth will come to 2.7 pct, a figure that is likely to be revised shortly considering the impact of the crisis during the closing months of the year. The figures mark a drop from the 5.2 pct of GDP deficit recorded in December of 2007 and the then 8 pct inflation rate.

The Hungarian currency has maintained a relatively stable value at app. HUF 250 to the euro; however, the global financial crisis has now begun dragging down Hungarian markets – substantially weakening the currency. Analysts agree that the main factor influencing this process is speculation. According to MNB’s governor, András Simor, there is no legitimate reason for the latest developments, adding that the bank is closely monitoring events and is ready to take any policy measures at its disposal to resolve the situation.

As the final outcome of the ongoing global credit crisis for Hungary has yet to be fully gauged, macroeconomic developments in the country have brought about significant divergences between the various sectors of the national property market, where an office building frenzy has taken hold in Budapest, together with shopping malls springing up all over the place, but with residential investors facing bleak times ahead.

Stuck in the capital

As disturbing as recent developments may have been to the commercial real estate segments of the Hungarian market, this should in no way affect the regional distribution of projects, with almost all major developments still being limited to Budapest. However, retailers also expecting better conditions in other parts of the country. In the opinion of TriGranit Hungary’s development director László Hajdu, the reason why no-one is investing in offices outside Budapest is primarily demographic. The second largest Hungarian city, Debrecen, has a population of only 205,000. “In such an environment, investors will not invest speculatively,” claims Mr Hajdu. In turn, a vicious circle has developed: there are no tenants looking to rent offices in regional cities because there are no suitable buildings, and nobody wants to build in the provinces because there are no tenants.

Constructors in trouble

Hungarian construction companies had been going through tough times even before the financial tsunami struck, due to a lack of the public procurement orders which constitute one of the main drivers of the Hungarian construction sector. The shortage has affected smaller businesses in particular, which typically operate in Hungary’s secondary cities. According to István Leskó, president and CEO of Épszer, during the months leading up to October, the construction industry had come to an almost complete standstill, reminiscent of the situation seen in the early 1990’s. Due to the shortage of private real estate projects in provincial areas, Épszer relies to a great extent on state orders, in the absence of which the company had to lay off 40 pct of its employees, as well as being forced to streamline its subcontractor base. Leskó’s concerns are shared by Gábor Futó, CEO of Hungarian real estate developer Futureal, who has told journalists that the construction industry will definitely suffer over the coming months, with as much as 50 pct of active builders likely to fold amid the real estate sector’s difficulties.

The September shock

Even though there have been no cancellations or projects postponed so far, it is not only constructors who are going through agonies, since developers are also feeling the pain. In the first half of 2008, several office projects were completed. The largest of these, the 25,500 sqm BSR Center developed by BSR/GLL, is currently operating with a 56 pct vacancy rate according to DTZ. The second biggest project was GLD Invest Group’s South Buda Business Park (22,500 sqm, 98 pct vacancy) and the third was TriGranit’s Millenium Tower III (19,600 sqm, 29 pct vacancy). According to Colliers International, the average class ‘A’ rent was app. EUR 12.5–13.5 per sqm. In light of the present market troubles and gloomy outlook, future rental fees are difficult to predict, but owners may have to offer 10 pct to 20 pct discounts in order to find new tenants.

According to Rémi Couture, director of research at Colliers International in Budapest, the demand on Hungary’s office market was very good, indeed exceptionally good in 2007, a trend that continued until Q2 of 2008. The crisis has cast an air of gloom over the market, leading prospective tenants to reconsider their plans to rent new space. “In fact, one could say that August and September were two different worlds,” believes Rémi Couture.

Colliers has not seen investors halting ongoing projects in the office sector, but there are concerns regarding new office supply. In 2008-2010 a huge volume of new office space will emerge on the market – GTC’s 61,000 sqm Spiral, Hochtief’s, 38,400 sqm Capital Square and TriGranit’s 33,600 sqm Millenium II–IV among others – and it is a troubling outlook to have such an abundance of supply in times when tenants are likely to have second thoughts about signing leases. There is a debate over whether the situation could force rents down or extend leasing durations, so the prognosis is not good even for office developers. Even if they can lease out offices, the longer durations entail that companies will be lacking cash-flow – and the same applies in the case of low rents. Investors could have difficulties in meeting their business targets.

Rémi Couture feels that “it is probably not the best time to start a large number of new projects.” However, there are several projects, including multi-use mega developments already in progress, with some 787,000 sqm of office space on the drawing boards. According to Futureal’s Mr Futó, the mentioned quantity of new office space entering the market can safely be “thrown out of the window.”

Where is the money?

Following an outstanding 2007, when a total of EUR 1.8 bln in overall commercial property investments was recorded, the volume slumped in the first half of 2008. “In the year to date, we have tracked EUR 113 mln of transactions in all sectors. The transactions we are currently aware of may increase in volume to EUR 400 mln toward the end of the year, but that will only bring the market back to its pre-2003 level,” reveals Colliers’ Rémi Couture. And in the wake of yet more dramatic changes on the market, Colliers is set once more to revise its forecasts.

The boom is over?

The retail sector in Hungary had been poised to have a better year due to the growth in internal consumption in an increasingly stable Hungarian economy. Analysts agree that the overwhelmingly pessimistic economic outlook could lead household consumption to drop. At the same time, high-street retail is still in fine health, as luxury brands continue to appear on the market.

According to the Hungarian Council of Shopping Centers (Bevasarlokozpontok Orszagos Szovetsege – BOSZ), the continuing shopping centre boom will reach its peak in 2010, after which the market will have reached such a level of saturation that there will be no more room to build. There will be 69 shopping malls in operation throughout Hungary by the end of the 2008, while the Budapest market alone to receive 11 further newcomers by 2011.

The first half of 2008 saw the completion of several new developments, mainly in Hungary’s secondary cities. By the end of June 2008, the modern retail stock had reached 1.58 mln sqm, with more than 0.8 mln sqm located in the greater Budapest area, according to DTZ. The major retail projects completed by the end of H1 2008 were aAIM’s 67,000 sqm Arena Plaza (purchased from the original developer, Plaza Centers), AIG Lincoln’s 44,000 sqm Market Central in Vecsés and WING’s 21,800 sqm Agria Park in the north-eastern city of Eger. Budapest leads DTZ’s per capita modern retail stock rankings with 477 sqm, ahead of Debrecen (267 sqm) and Győr (382 sqm).

No bubble to burst

“Although Hungary’s residential segment produced the worst indicators in the real estate industry during the year, the sector will probably be able to survive the ongoing crisis without any acutely painful losses,” Mr Futó of Futureal claims. Since Hungary was among the few countries where there has been no real estate bubble, “there was nothing to burst,” according to Mr Futó. The company is currently building some 2,000 apartments in Budapest and is expecting an annual price increase rate of 10 pct over the next few years, which can be considered healthy considering the 6 pct to 8 pct inflation rate in Hungary.

According to current statistics compiled by the ingatlan.com property portal, the average flat in Budapest costs HUF 23.6 mln (EUR 93,000), assuming an average size of 69 sqm and an average sqm price of HUF 342,000 (EUR 1,350). In comparison, Győr offers the most expensive apartments of the secondary cities, with a HUF 13.3 mln (EUR 52,582) average price, with sizes and sqm prices averaging 65 sqm and HUF 205,000 (EUR 810), respectively.

There are only a small number of residential plots for sale, most of them concentrated in central Hungary. The most expensive is a HUF 300 mln site spanning 22,000 sqm in central Hungary, near Zsámbék. As for Budapest, prices have either stagnated or fallen away from last year’s figures, as the latest survey by residential consultant Otthon Centrum reveals. The most lucrative sites can still be found on the Buda side of the city, where plots are sold for HUF 160,000-220,000 per sqm. At the bottom of the ranking is the tenth district, where the same indicator gives a figure of HUF 20,000-30,000.

Pining hopes on logistics

As Hungary’s secondary cities are mainly industrial, most local developments tend to be facilities in industrial parks. The dynamism exhibited by Hungary’s warehouse and logistics market that started in 2007 continued into H1 2008, with 165,500 sqm of new space completed, boosting the current supply of modern stock to 1,200,000 sqm, according to DTZ. The consultancy’s analysts are predicting that 250,000 sqm will be added to the market in 2008 and another 300,000 sqm in 2009. In subsequent years, another 400,000 sqm of industrial and logistics premises should come onto the market, according to the forecasts. The major projects in the industrial sector listed by DTZ for the 2008–2010 period are Segro’s 150,000 sqm Aerozone Logistics Park in Üllő, ProLogis’ 29,664 sqm ProLogis Park Batta in Százhalombatta and Goodman’s 21,000 sqm Gyál Logistics Centre – all in central Hungary.

The logistics vacancy rate stood at 15.8 pct in mid-2008, according to Colliers, a significant leap from the 9.1 pct of late 2007. The boost is due to the portfolio of Rynart becoming available, with some 95,000 sqm of the firm’s total space of 127,000 sqm still vacant. Industrial plots are on sale for app. EUR 20 per sqm countrywide, depending on the available infrastructure and accessibility. The biggest piece of land for sale is a 50-ha plot, priced at HUF 5 bln (EUR 19.1 mln). As there are only a handful of such huge and expensive plots, there is a huge gap in the rankings, with the next price bracket starting at HUF 450 mln (EUR 1.71 mln), and then down to plots offered for as little as HUF 10 mln (EUR 38,000). The areas of the sites vary between 120,000 sqm to 5,000 sqm. ν